Russian Corporate Profits Drop 4.4%

Russian companies made less profit in the first eight months of this year than in the same period last year, but analysts say the decline should not be interpreted as a negative trend.

The State Statistics Committee reported this week that Russian companies' combined consolidated profits for the period were 752.9 billion rubles ($26 billion) compared to $27.9 billion in the first eight months of 2000.

Industrial companies contributed the most to the overall 4.4 percent decline with a drop in consolidated profits of over 15 percent, the committee said.

Meanwhile, some sectors saw a consolidated profit increase, such as communications with a consolidated profit growth of 136.8 percent, the tourism sector with a rise of 130 percent, and construction, which was up 120.5 percent.

According to research by Renaissance Capital, even though in real terms the consolidated profits may have fallen more than 22 percent, this was mostly due to the strengthening of the ruble.

At the same time, Renaissance in a research note points to the encouraging fact that, according to the State Statistics Committee, the number of loss-making companies overall has declined by 2.4 percent.

The decline in consolidated corporate profits, caused primarily by external factors, is less important than the relative rise in the number of profit-making companies, the Renaissance note says.

"There are several factors behind the decline in the number of loss-making companies," said Renaissance analyst Alexei Moiseyev.

"This means either that companies operate more efficiently or report their profits more accurately, or this could mean that more loss-making companies are shutting down. From the point of view of economics, it does not matter for me which of the factors is at work, I'm comfortable with any of them, what matters is the result," Moiseyev said.

"I wouldn't give too much importance to [the decline in profitability]," said Troika Dialog executive vice president Oleg Vyugin.

"The high level of profitability we saw in 2000 and in the first half of this year is largely due to very high oil prices, extremely positive trade balance, high liquidity in all sectors of the economy, even the less competitive ones," Vyugin said.

" At the same time, the ruble still remains devalued in real terms. If you compare this with the pre-crisis situation, Russian companies still have an advantage over foreign competitors. But the situation is changing – the ruble is getting stronger while oil prices fall, so profitability is bound to decline," he said.

"However, I don't think this is something to be worried about. First of all, [the profitability figures reflect] the average patient body temperature in a hospital, second, a company can operate even with a 2 percent to 3 percent profit margin.

"The main thing is that the share of loss-making companies is diminishing — this is more indicative," Vyugin said.